Nouriel Roubini writes a thoughtful piece on the Citibank super-SIV.

“Such banks played a reckless game of regulatory arbitrage by creating risky off-balance sheet SIVs, loaded with risky assets and funded with the most short term asset backed CP in order to avoid the Basel capital charges for similar on balance sheet assets. The whole point of bank capital regulation is that banks that get the lender of last resort support of the central banks need to have enough capital to avoid the gamble for redemption games of playing at a casino with the money of depositors. But banks first avoided those capital charges by creating the off-balance sheet SIVs with lower capital charges and then, when the roll-off of the liabilities of such SIVs occurred amply relied on the Fed’s lender of last resort lending – and on explicit Fed bending of strict rules on how much the banks could re-lend to their affiliated and SIVs – to avoid the losses that they would have incurred by their reckless creation of illiquid SIVs (as well as accepting for repo operations assets whose true quality is dubious as the Fed has not clearly explained what assets it now accepts in its repo and discount window operations). This is moral hazard of the first order: avoid capital regulations via off balance sheet dangerous schemes characterized by serious maturity mismatches, high liquidity risk and gambing for redemption by investing in toxic waste securities; and then get free lender of last resort support when the liquidity roll-off occurs.”